FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Explanation of Changes in Trust Insurance Coverage Under FDICIA

FDIC-92-98

December 28, 1992

Adrienne George, Attorney

Re: Critique of Trust Portion of New York Times Article

Pursuant to our recent telephone conversations, I am providing my
criticism of the trust portion of Michael Quint's article which
appeared in the November 11, 1992 New York Times. It is my
understanding that you have already contacted Claude Rollin for his
comments on the rest of the article.

In his article, Michael Quint wrote:

In another change, coverage for money held in trust by a bank
is combined with coverage for other accounts. In the past, coverage for
trustee funds was separate from other coverage.

New York Times, November 11, 1992.

The above statement is incorrect. Before the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC
allowed two kinds of separate insurance coverage for a revocable trust
having a bank as trustee. First, section 7(i) of the Federal Deposit
Insurance Act (FDI Act) provided that the deposits of a revocable trust
with a bank as trustee would be separately insured from the deposits of
another revocable trust with the same terms but with an individual as
trustee, when deposits in both trusts were held at the same insured
depository institution. Second, the deposits of a revocable trust with
a bank as trustee would be separately insured from other kinds of
accounts held at the same bank, provided that those other accounts were
held in a different "right and capacity" from the revocable
trust account. For example, if a grantor--the person who established
the trust-- was using the trust to give a vested trust interest to a
beneficiary who was his spouse, child or grandchild--that is, to a
"qualifying beneficiary"--that interest would be separately
insured from the grantor's individually-owned account, and also from a
joint account

which that grantor owned with his wife. Also, that trust interest
would be separately insured from the beneficiary's individually-owned
account, and from a joint account which that beneficiary held with his
wife at the same bank.

Similarly, before FDICIA, there were two kinds of separate insurance
coverage for an irrevocable trust with a bank as trustee. First,
section 7(i) of the FDI Act provided that the deposits of an
irrevocable trust with a bank as trustee would be separately insured
from the deposits of another irrevocable trust with the same terms but
with an individual as trustee, when deposits in both trusts were held
at the same insured depository institution. Second, the deposits of an
irrevocable trust with a bank as trustee would be separately insured
from other kinds of accounts held at the same bank, provided that those
other accounts were held in a different "right and capacity" from
the irrevocable trust account. For example, if a grantor was using his
irrevocable trust to give a noncontingent trust interest to a
beneficiary--in the case of an irrevocable trust, the beneficiary need
not be limited to his spouse, child or grandchild--that interest would
be separately insured from the grantor's individually-owned account,
and from a joint account which that grantor owned with his wife. Also,
that trust interest would be separately insured from the beneficiary's
individually-owned account, and from a joint account which that
beneficiary held with his wife at the same bank. I should add that
revocable trusts without a bank as trustee, and irrevocable trusts
without a bank as trustee, are also frequently entitled to separate
insurance coverage from other kinds of accounts held by the grantor
(and beneficiaries) on the basis of separate right and capacity.

What FDICIA did--and this change will not become effective until
December 19, 1993--was to say that section 7(i) of the FDI
Act would be changed to give only irrevocable trusts with a bank as
trustee separate insurance coverage on the basis of the FDI Act's
section 7(i). Thus, FDICIA provides that revocable
trusts with a bank as trustee will no longer receive separate
insurance coverage under 7(i), but they may still qualify for separate
insurance coverage because they are being held in a separate right and
capacity from the grantor's (and beneficiaries') other accounts. This
change means that, when funds for two identical revocable trusts, one
with a bank as trustee and the other with an individual as trustee, are
deposited in the same bank, these funds will be added together for
insurance purposes--that is, they will not be separately insured from
one another. However, the funds of these revocable trusts, added
together, may still qualify for insurance coverage that is separate
from the coverage allotted to other kinds of accounts held by the
grantor and qualifying beneficiaries, on the basis of separate right
and capacity.

Thus, the change wrought by FDICIA on the insurance of trusts is far
from the global, all-encompassing change which Michael Quint describes
in the statement quoted above.

I hope that this critique will be useful to you. If I can be of any
further help, I can be reached at (202)
898-3859.